The big planning issues for the year ahead

The new year presents a number of challenges and opportunities for financial planners wanting to add value for clients. Tim Gunning takes a look at some of the most ex-citing opportunities to look out for in the year ahead.

The new year presents a number of challenges and opportunities for financial planners wanting to add value for clients. Tim Gunning takes a look at some of the most ex-citing opportunities to look out for in the year ahead.

Changes to the capital gains tax (CGT) regime announced in Ralph reforms have, in some ways, turned the financial planning world on its head, creating opportunities from an advice point of view. Indeed, financial planners will have to think more care-fully about the tax ramifications of the investment advice they are giving.

The changes to the CGT system affect the way investors are taxed when they hold an investment directly or through a superannuation fund. Under the new rules, only half of a nominal capital gain is taxed for ordinary investments held directly for at least one year while one third of the realised nominal capital gain will be taxed for invest-ments held by super funds.

Indexation of the cost base - which had previously protected investors from inflation — was frozen at 30 September 1999.

The changes apply to all assets purchased after 21 September 1999, but those who made investments prior to this date will also have the choice of falling back on the old rule (a tax of 100 per cent of the real capital gain), if they want.

The choice will depend on each situation. As a generalisation, clients whose invest-ments have not significantly outperformed inflation may well be better off under the old rules. But as more time transpires, more people will be better off under the new rules.

The new rules mean that most superannuation funds will pay a minimum of 10 per cent tax on the nominal capital gain of investments while individuals will be taxed at a maximum of 24.25 per cent.

These changes are of obvious interest to clients in the top marginal tax bracket who previously had to pay 48.5 per cent in tax on capital gains.

One implication is that there will be more pressure on investors to hold investments directly, a move that could see financial planners fast brushing up on their direct eq-uity skills. One loser could be investments in managed funds which are set to be taxed at a slightly higher rate than those held directly.

The use of companies to hold investments will also decline. While the rate of corpo-rate tax is set to fall over the next three years to 34 per cent by July 2001 and 30 per cent from July 2002, this rate is still higher than the CGT now paid on assets held di-rectly.

Added to this is the possibility that the dividend paid out to shareholders could be taxed as high as 48.5 per cent, if the investor is in the top marginal tax bracket.

The previous CGT system acted as a powerful disincentive to selling assets, including property, even where these assets were not performing. Financial planners will now be increasingly able to recommend the disposal of these non performing assets — a trend that should lead to more turnover in these investments

Superannuation

The self managed superannuation funds market presents major opportunities to finan-cial planners this year because of its rapid growth.

Over the past two years, there has been a lot of wealth generated. The swing has been into self managed superannuation funds, which generally become cost effective when clients have assets of $200,000.

Also boosting the opportunities are legislative changes which will require some al-terations of certain funds.

Firstly, there is Slab 3 which changes the definition of a superannuation fund and will force some superannuation funds to restructure their trustee arrangements.

Slab 4’s major impact will be for trustees who have investments in geared unit trusts. And, there are fairly generous transitionary benefits which allow them to unwind these.

Some of the self managed super strategies that can be used by investors include:

? Using franking credits to offset the tax payable in their funds.

? Switching into allocated pensions and the sale of assets in retirement. If the asset is sold after the pension phase has started, tax is paid on the pension paid and not on any capital gains realised within the fund.

? Using undeducted contributions to increase the deductable amount of the pension paid.

Another area where financial planners will be able to add value in superannuation is by advising clients on how to deal with excess benefits or amounts that exceed their relevant reasonable benefit limit (RBL). The need for this type of advice will be greater in the new millennium as more investors use superannuation as a savings ve-hicle.

Among the strategies that can be used are:

? Purchasing eligible termination payment (ETP) income streams, thereby deferring payment of tax (in some instances, they can defer this indefinitely).

? Structuring complying income streams for self managed superannuation funds which have a higher RBL limit.

? Using a non-complying fixed term pension because, in some cases, the fixed amount has less of a capital value which may produce a lower RBL amount than an allocated pension.

GST

Despite some hype, the introduction of the GST will have little impact when its comes to plotting clients’ investments. It is more of an administrative issue for financial planners in how they structure their own businesses.

However, GST will be an issue that planners must consider when giving advice to self managed superannuation funds, especially when it comes to assessing whether a trus-tee can claim an input credit for advice and administration services to the fund.

Tim Gunning is general manager of technical services and training at Sealcorp Holdings.